Microsoft shifts its search to AOL

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MICROSOFT has reacted to continued knock backs from Yahoo to sell its online search arm by starting talks with Time Warner to buy its AOL subsidiary.

AOL, formerly America Online, has emerged as an alternative for the software giant which, in results reported last week, recorded a net profit of 2.2bn in April-to-June but lost around 445m from its online advertising division.

Silicon Valley insider Henry Blodget said a team from Time Warner/AOL met executives at Microsoft's Seattle headquarters last Tuesday.

"The two have talked many times before. But this is reportedly the closest the companies have come to a deal so far," said Blodget. "It sounds as though Microsoft is now working more diligently on a Plan B.

"To remain competitive in online advertising Microsoft needs to quickly expand its footprint on the internet. But there is a limited number of large internet companies or operations to buy."

Time Warner bought AOL's ailing global internet services and media holdings in 2001, taking advantage of a massive dip in its stock from 113bn to about 10bn and a customer base decrease from 30 million to 10 million subscribers. The company is understood to be eager to sell AOL, whose subscriber base numbers are identical to Yahoo's, if the price is right.

In the technology sector's typical merry-go-round, AOL has also been talking to Yahoo, which is heading towards a proxy battle involving 5% shareholder billionaire Carl Icahn that threatens its current board. But discussions have yielded no outcome.

Blodget said a price tag for AOL of up to 7.5bn had been muted. This is around the same figure reported last weekend when Microsoft's chief executive Steve Ballmer bid yet one more time for Yahoo's search business.

Ballmer is eager to turn round the fortunes of his company's internet-based division and take Google head on. One source said he had decided to hedge his bets by talking to Time Warner, although the Yahoo takeover bid is anything but dead in the water.

"Microsoft urgently needs a partner of sufficient size to achieve a global stripped-down conversion of its systems on our laptops and handheld computers along with desktops," said Blodget.

Earlier this month, Balmer hinted that the company's business model had to change if it is to achieve its aim of becoming market leader in the highly lucrative search business.

This involves pairing up with an AOL or a Yahoo, to convert its still hugely profitable operating system and office software business onto numerous online applications. Big returns are promised from advertising and subscriptions by the internet.

Analysts welcomed the move on AOL. Sid Parakh, an analyst with McAdams Wright Ragen, said a "back and forth with Yahoo and Microsoft every day" was distracting the market.

When Microsoft posted its latest results, shares fell 6% in after-hours trading in New York. Google also reported quarterly results last week that were below forecasts, although showing a 35% rise in net profit to 626m for April to June.

The firm's shares fell 8% in after-hours trading.